ECONOMIC-REFORM AND ALLOCATIVE EFFICIENCY IN CHINA STATE-OWNED INDUSTRY

First describes the reforms that have been introduced and considers their likely effect on economic efficiency, then data gathered by the World Bank from 20 state-owned enterprises in China are used to investigate empirically whether total factor productivity at the enterprise level has risen during the reform period and whether there is evidence that allocative efficiency has increased. The main empirical finding is that for these 20 firms total factor productivity (TFP) has grown rapidly, at an average rate of 4.7% per annum. Furthermore, the dispersion across firms in the level of TFP declined markely between 1978 and 1982, which indicates an improvement in allocative efficiency. Finally, across enterprises, TFP growth is positively correlated with the share of profits retained by the firm and with the amount of retained profits per worker, which is consistent with the hypothesis that material incentives have been a source of this increase in allocative efficiency. Interpretation of these results requires some caution: the 20 enterprises surveyed by the World Bank are not a representative sample of Chinese state-owned industry, in that no money-losers were included in the study. The results presented here suggest that industrial reform in China, in particular the creation of material incentives for workers and managers, must be judged at least partially successful in its stated goal of improving allocative efficiency. -from Author